What Happens if You Cash in a Savings Bond Before the Maturity Date?

by Beverly Bird

What Happens if You Cash in a Savings Bond Before the Maturity Date?

Savings bonds are considered a safe, tried-and-true means of saving money. They're "debt instruments" of the U.S. government. You give the government your money and the government can then use it to make its ends meet. In exchange, you get the bond and two promises: You're promised a modest return on your investment, and you're promised that the bond will be worth its face value within a given period of time.

The face value promise is important because most bonds are purchased at 50 cents on the dollar. In other words, you'll pay $25 for a $50 savings bond. You'll eventually get your money back when you redeem the bond or cash it in, plus extra if you've waited long enough that it has achieved face value. You'll also get interest that accrued during the period of time you owned it.

What Does "Mature" Mean?

For the most part, you can redeem a U.S. savings bond anytime you'd like. It doesn't have to mature before you can ask the government for your money back plus interest earned. The term "maturity" simply refers to the date at which the bond stops earning interest. That's 30 years from the date of purchase for most bonds, although Series E bonds purchased before November 1965 matured 40 years from the date of purchase.

As a practical matter, it makes no sense not to redeem the bond if it's no longer earning money for you, and the U.S. government wants you to do so if the bond has matured. If you hold bonds past this date, it can open the door for some unpleasant tax issues.

If you're unsure when your bonds mature, you can check their status on the TreasuryDirect website by clicking on "Are your Treasury Securities still earning interest?"

The One-Year Rule

Of course, this is the government we're talking about, so there are rules and requirements. You can redeem your bond anytime you'd like and before the maturity date, provided that at least a year has passed since you purchased it. Your bond must be at least 12 months old. It can't be redeemed otherwise.

The Five-Year Rule

There's a five-year rule too. After you get past that 12-month benchmark, you might want to hold on to the bond for another 48 months, because if you redeem it within the first five years, there's a penalty. You can cash it in, but you'll lose the last three months of interest it earned.

Tax Issues

The interest your bond earns is considered taxable income, so the government or the financial institution that redeemed your bond will issue you tax form 1099-INT, showing just how much interest your bond paid. You must claim this money on your tax return in the year you redeem the bond.

You can't avoid reporting and paying taxes on the income by simply not redeeming your bond, even if it has matured. You must report it on your tax return in the year of maturity regardless of whether you actually took the money. This could end up being a somewhat significant lump sum after 30 years, and if you don't do so, the IRS can impose a penalty.

You do have another option, however. You can opt to report and pay taxes on the earned interest yearly instead. You don't have to redeem the bond to do this.

Other Rules and Considerations

You don't have to redeem most bonds in their entirety. You can cash in just a portion – as little as $25 if you bought electronic bonds through TreasuryDirect. The exception is paper bonds. These have to be redeemed in full.

You can dodge taxation if you use the money from a redeemed bond to pay for qualified education expenses for yourself or your dependents in the same year that you cash it in.

The TreasuryDirect website can also tell you when your bond will receive the next interest payment. You probably won't want to redeem it on Monday if it's scheduled to earn more interest on Friday. EE bonds typically earn interest monthly, and that interest is compounded twice a year.